Wool

Thursday, December 17, 2015

A review of staple and mid-break P&Ds

Key points

For 18 – 19 micron fleece wool, staple strength currently accounts for variations in price of around 7-8%.

In addition, mid-break levels can push prices up or down 2%, although some very high mid-break lots were punished last week.

Both staple strength and mid-break levels in November were on par with five year averages for November wool offerings.

Valuing wool depends primarily on the breed, category (fleece, pieces, bellies, locks or crutchings), staple length and then a range of lesser variables which vary in importance according to the category of wool. An additional complication is that exporters build consignments by aggregating individual farm lots. So while the sell side views the market at an individual lot level, the buy side views the market at a consignment price level. What is the effect of staple strength and mid-break on the price of 18-19 micron fleece wool in the current market?

To start with, figure 1 shows the average price for the first two weeks of December for 90 mm long 18 and 19 micron fleece wool for a range of staple strengths - with locks and crutching prices added for perspective. The fleece price is fairly steady for high 30’s staple strength and higher. As the staple strength falls from the high 30s down to the mid-20s prices decline. The price then steadies for the very low staple strength levels. All up the fleece price varies by only around 100 cents for the different staple strength levels, which is only around 7% of the base price.

Staple strength in November averaged 35 N/ktx. This was slightly above the five year average for November of 34 N/ktx. Staple strength in the Australian clip is running at normal levels at present.

The story about staple strength is complicated by position of break, specifically the mid-break level. Exporters need to build consignments within certain parameters, which for combing wool lots often include an average mid-break level.

In the spring of 2014 when 20% of the offerings had high mid-breaks, exporters struggled to build consignments with appropriate parameters. As a consequence, the premiums for low mid-break and discounts for high mid-break increased markedly. Currently, the level of mid-break in the offerings matches the five year average for this time of the season. That said, the level of high mid-break wool tends to peak around Christmas, which explains why its price effect has picked up in recent months.

Table 1 shows prices averages from last week for 18-19.5 micron, 70-95 mm long across a range of staple strengths and mid-breaks. There is a little “noise” in the data, but essentially you will see that prices fall as strength falls. Mid-break acts as a secondary factor, lifting low mid-break prices and pushing down high mid-break prices. There were some other categories of wool with high mid-break levels that have received heavier discounts in recent weeks. This fits with this time being the peak high mid-break supply for the season.

What does this mean?

The supply of low tensile strength wool and high mid-break wool is at normal levels in the clip. High mid-break levels tend to peak mid-season (around the Christmas recess), so the price effect of mid-break will probably follow suit. If you have a lot with high mid-break (say 90%) that could be heavily discounted, then waiting into 2016 to re-offer makes some sense. Overall, the effect of staple strength on 18-19 micron fleece prices remains at moderate to low levels (100 cents or 7-8%), with mid-break a secondary factor. It will take a sustained fall in the cardings market to allow discounts for low tensile strength to widen for combing wool types.

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